«The great Australian dream of home ownership is becoming a nightmare,» said Brendan Coates, a housing policy expert at the Grattan Institute. «It’s down to a collective failure of government policy that will take at least two decades to fix.»

One of the biggest flashpoints are tax incentives that have turned housing into a speculative financial asset. First-home buyers complain they can’t compete against investors, who through negative gearing can claim the costs of owning a property-for-rent — including mortgage interest — as a tax deduction against other income. The allure of property investment was turbocharged in 1999, when capital gains tax was halved. With housing prices seen as a one-way bet, investors piled in.

More than 2 million, or one-in-12, Australians own an investment property, with almost 30 per cent of those owning two or more.

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«More money going on servicing a mortgage means there is less to spend elsewhere, dragging on economic growth,» said Paul Dales, chief Australian economist at Capital Economics. «It won’t take many rate rises for indicators to start flashing amber and red for more-indebted households.»

Red-hot property markets are putting prices out of reach for young Australians. Photo: Chris Hopkins

As the average price of a Sydney home sailed past $1 million, housing affordability fell victim to the hyper-partisanship that has gripped Canberra over the past decade and paralysed policy making. During last year’s election campaign, when the opposition Labor party proposed changes to limit negative gearing to newly-built houses and reduce the capital gains tax discount, Prime Minister Malcolm Turnbull retaliated by ruling out any changes and launched an assault claiming Labor’s move would «take a sledgehammer» to the property market and «punish» mum and dad investors.

A package of measures in the May budget aimed at improving housing affordability only tinkered at the edges — targeting overseas investors who leave properties vacant and offering tax breaks for people saving for a deposit on their first home. State governments have also done little to address the issue, relying on policies such as stamp duty discounts or grants to first-home buyers that just act to push prices up even further.

KKR’s latest deal suggests a view that economic strength in Australia and New Zealand is stronger than many outsiders recognise. Photo: Paul Rovere

«What politicians have offered so far are band-aid solutions that might be popular in the short-term but will be ineffective in the long-run» said Judith Yates, who has advised the government on housing policy and is an honorary associate professor at the University of Sydney. «There hasn’t been a serious attempt to tackle the fundamental causes of declining affordability.»

It’s down to a collective failure of government policy that will take at least two decades to fix.

Brendan Coates, a housing policy expert at the Grattan Institute

In contrast, other global cities – have taken more draconian measures to rein in home prices. Singapore has rolled out a series of measures from banning interest-only loans to pushing up stamp duty, triggering a three-year slide in prices. In Canada, prices have slumped in Toronto after the provincial government announced a slew of measures, including a 15 per cent tax on foreign buyers and the introduction of rent controls.

Adding to demand pressures, Australia’s migration program has helped swell the population by almost 4 million since 2006, with most settling in the major cities. Supply has been unable to keep up, with dwelling completions running below underlying demand for more than a decade. Much of the new housing is small apartments aimed at investors, rather than families.

Melbourne has been named the most liveable city in the world. Photo: Michael Dodge

There is also a social cost to sky-high house prices. Workers such as teachers, nurses and other low-to-middle income earners can’t afford to live in the communities they serve, while young people who stay at home longer while saving a deposit might delay marriage and childbirth.

«It’s a very different atmosphere in Australia,» said Professor Richard Ronald of the University of Amsterdam’s Centre for Urban Studies. «I haven’t come across this kind of resistance elsewhere to the understanding of ‘Generation Rent’ as a fundamental shift in history.»

New housing projects are geared towards smaller properties that are more appelaing to investors rather than families. Photo: Peter Rae